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Covid-19 and the UK regions

The economic impact of the pandemic is unlikely to be felt equally across UK regions and nations.

In my previous post, I started to examine the overall global economic impact of Covid-19. Here, I start to examine the impact of the pandemic on the UK economy—and in particular, on the UK’s regions and nations.

With the scale and duration of the pandemic and associated lockdowns still unknown, estimates and forecasts of the impact on UK GDP are still impossible to make with anything approaching precision or certainty. Although the Office for Budget Responsibility’s latest official forecast for UK GDP growth was made before the scale of the pandemic became apparent, it more recently published a scenario in which UK GDP contracts by 35% in Q2 2020 before rebounding.[1] The IMF published new forecasts on 6th April indicating that UK GDP will contract by 6.5% in 2020, recovering to 4% growth in 2021.

Even with so much uncertainty, it is apparent that the economic impact in the UK will not be felt equally among regions. In the near term, the current crisis may well exacerbate existing regional inequalities. Although many advanced economies have sizeable economic gaps between their better- and less-well-off regions, almost nowhere is this dynamic as pronounced as in the UK. These gaps have been well-documented. It will come as no surprise that parts of central London are literally 10 times wealthier than west Wales and southern Scotland—but recent data also show that per-capita GVA in the UK’s wealthier regions even outside London is around 50% as high as in its poorer regions. For example, GVA per capita in the North East is £20,554 while the figure in the South East is £30,356.[2]

Loss of income associated with lost or reduced employment will naturally have varying effects depending on (among other things) the level or pre-pandemic household income—which differs widely across the UK’s regions:

Regional gross disposable household income, £ per head

2017

London

27,825

South East

22,568

East of England

20,081

United Kingdom

19,514

South West

18,984

Scotland

18,099

East Midlands

16,932

West Midlands

16,885

North West

16,861

Yorkshire and The Humber

16,119

Northern Ireland

15,813

North East

15,809

Wales

15,754

Source: Office for National Statistics

Current policies may, to some extent, blunt regional disparities in Covid-19 impacts. For example, given the wide regional variation in average income, the fact that the government’s income support for furloughed workers is capped at £2,500 per month means that a higher proportion of furloughed workers in regions outside London and the South East will receive full support at 80% of salary.

The varying economic structures of UK regions and nations will also lead to differentiated economic outcomes from Covid-19. As I noted in my previous post, ‘distribution, transport, hotels and restaurants’—the sector which is suffering the biggest direct hit—accounts for almost 30% of total UK employment. Adding in construction and education, the two other sectors which are expected to be most directly affected, this proportion rises to 41%. But there are some notable regional variations. For example, the wholesale, retail and vehicle repair sector accounts for 12% of employment in London but 17% in the East Midlands and North West. Accommodation and food service represents nearly 10% of employment in the South West but a more modest 5.8% in the West Midlands. Within regions, areas that rely very heavily on extremely vulnerable sectors—towns that predominantly cater to tourists, for example—are (obviously) most likely to see significant job losses.

Looking at output rather than employment, the Centre for Progressive Policy applied the Office for Budget Responsibility’s estimates of the economic impact of Covid-19 on different sectors to the distribution of local authorities’ sectoral GVA to conclude that the Midlands and the North West are the regions likely to be most affected in terms of GVA. The note that “nine of the 10 worst affected local authorities are in the Midlands or the North West” and that “of the 20 hardest hit local authorities, only one–Hart–is in the South East or London.”[3] (As with all such economic analysis, these results must be seen in the context of the underlying assumptions.)

It is simply too early to tell, though, whether Covid-19 will ultimately improve or worsen regional disparities. In the medium- to long-term, it is possible that Covid-19 might help mitigate inequalities. Income inequality tends to widen overall in periods of faster economic growth and narrow when growth is slower, driven by the differing magnitude of income losses among high-earners and low-earners. For example, in the aftermath of the 2008-09 financial crisis income inequality, as measured by the Gini Index, declined markedly in the UK (for a time):

Looking at the current situation, it is well-documented that pandemics can be a ‘levelling’ force. The economic historian Walter Scheidel, for example, deemed pandemics one of the “four horsemen” of levelling—i.e., of inequality reduction (the others being mass-mobilisation warfare, revolution and state collapse).[4] Thankfully, since the scale of the Covid-19 pandemic is vastly more limited than that of the examples cited by Scheidel (notably the 14th century bubonic plague), some of these pandemic-induced levelling forces, such as structural changes in demographics, will not apply to the current crisis.

For now, the crisis should prompt policymakers to consider anew some long-standing potential solutions to the problem of regional inequality, such as devolution of political and potentially fiscal powers. Academics, think tanks and others have published rigorous analysis and policy recommendations in recent years. But almost all of the existing policy proposals had been made assuming the existing socio-economic and cultural framework—and that was before Covid-19 completely rewrote the rules of the economy, economic priorities, and the relationship between the state and society. More than ever, what is needed is a more fundamental mindset change for the UK as a whole.

First, the framework of ‘London vs the regions’ should be re-thought. Although this formulation is a statistical convention—and also a convenient political shorthand—it serves limited purpose given that London is utterly unique in the context of the UK. London is one of only two large, international, advanced-economy cities in the entire world, the other being New York: besides these two (population c. 9m each), the only other cities in OECD countries with sizeable populations are Tokyo (c. 14m) and Seoul (c. 10m) but historical and cultural legacies mean that it is difficult to describe these two Asian megacities as truly ‘international’. At the same time, Covid-19 has demonstrated all too starkly that despite that uniqueness in the context of UK cities, London is neither isolated nor independent in any sense from the other UK regions.

In this context, a focus on sustainable and inclusive post-pandemic economic growth, underpinned by a revamped approach to productivity, skills and education, would be vastly more beneficial for the 58m people living outside London, and do far more to improve their quality of life than a misleading ‘us vs them’ narrative—a narrative which, by perpetuating dissension and division, also seriously diminishes the potential of the UK as a whole.

At the moment, government and society are rightly focused on the public health crisis, minimising the loss of life and ensuring that a critical public service—healthcare—remains functional. But in time, when focus shifts to economic rebuilding, more balanced regional economic development must be woven into the fabric of any post-crisis recovery plan. Government policy should provide a supportive enabling environment in which the businesses that survive this crisis and those new ones that have yet to be founded can thrive—and this will require allowing regions and cities more control over their own policymaking, as well as reframing the national narrative about the relationships between the UK’s constituent parts. These are bold suggestions—but, relative to the immense scale of the long-term task ahead, not at all unreasonable ones.

[2] Office for National Statistics, ‘Regional gross value added (balanced) per head and income components’, (19 December 2019), available at: https://www.ons.gov.uk/economy/grossvalueaddedgva/datasets/nominalregionalgrossvalueaddedbalancedperheadandincomecomponents